Having more than doubled GDP in the past decade, sailed through the global financial crisis, brought some 160 million people into cities, created global firms such as Alibaba, Tencent and Huawei, managed a once-in-a-decade leadership transition, and covered the country in super-high speed trains, China’s list of achievements is long and impressive.
Yet international markets have gone into tail spins over gyrations in China’s insular stock markets and relatively marginal, market-oriented, adjustments in the RMB exchange rates.
Indeed, what is going on? No doubt there is a crisis of confidence, but it is not just a China problem.
That the recent events in China could so unsettle global markets, says much more about the parlous state of global confidence than China’s economy.
China’s economy is definitely quite a bit weaker this year than the Government and analysts had expected.
July’s PMI of 44 (below 50 is contraction), was the weakest in years and points to manufacturing slowing more quickly than anticipated. This is despite the Government’s efforts to stimulate activity through three (now five) cuts in interest rates and four cuts in the mandatory Reserve Requirement Ratio (liquidity for banks).
The stock market tumble in June was largely in response to perceptions that these measures were proving to be ineffectual.
The market had been talked up by the Government from October last year and had more than doubled in value. Despite the big falls since then, many punters would have still been ahead if they had got in early. The last two weeks, however, have seen all the gains of the past year disappear.
In response it was initially the Government that panicked – banning short selling, forbidding institutional investors from selling, threatening and cajoling traders, and even inventing overnight a new criminal offense, “malicious short selling”.
The Government clearly did not appreciate that the market’s exaggerated values, largely attributable to its talking up the market, were unsupported by fundamentals.
Similarly, RMB devaluation should not have surprised markets. It had appreciated over the past year by some 14 per cent against USD. And while China is still running big current account surpluses (essentially exports over imports), capital outflow has been increasing. So the capital account has for months been putting downward pressure on the exchange rate.
Moreover, Beijing has been in very public discussions with the IMF over the RMB’s joining the basket of currencies that make up the SDRs (Special Drawing Rights – a synthetic currency). The IMF was both urging a downward move of the RMB and a widening of the bands in which it could move against USD as part of market-oriented reforms.
The shock and awe of China’s adjustment came more from international headlines and 24/7 television business show commentators than anything the Chinese Government had done.
Over three days, the cumulative depreciation was about 4.4 per cent – a mere tweaking compared with the Yen’s 16 per cent or the Euros 20 per cent depreciation against USD.
Most of China’s ASEAN trading partners, and of course Australia, have all depreciated their currencies by even more.
The negative impact on global confidence resulting from both the stock market dive and modest exchange rate adjustment was attributable more to the way the Chinese Government managed these events, rather than intrinsic economic issues.
In the case of the stock market, it was the Government’s unexpectedly heavy-handed, interventionist, response that surprised everyone, including many Chinese.
In contrast, with the RMB it was the timidity with which the Government went about its business. It is usual for Governments to act decisively when adjusting their currencies, making big bold moves, to show markets they are in control and confident.
In this case, Beijing took three bites of the cherry and so created a sense of crisis and set off expectations that more adjustments were to come.
The unsettling aspect of this is that markets had come to expect astute, assured economic management from Beijing. The last few months have fractured that perception.
Beijing is trying to manage a slow down in growth, structural adjustment and a global economy in disarray. Evidently the economic policy team in Zongnanhai is beginning to struggle with the challenges as well.
But China’s economy remains fundamentally robust. Its growth rate this year will be in the order of 6-7 per cent, still among the highest in the world.
Significantly, structural change is well advanced with services now accounting for just over half of the economy – the “workshop of the world” is rapidly becoming its services centre – and driving this, consumption now accounts for about 50 per cent of GDP growth.
The crisis of confidence then is not a China problem, though there is some there as well. Fundamentally it is a global problem.
For as long as the US Federal Reserve prevaricates and sends mixed messages about quantitative tightening, relatively small events in the world’s second biggest economy will be magnified well beyond their economic significance.